E-Bay and other online auction sites are one of today’s hottest trendsand like many other Americans, you may have caught the online auction bug. Whether you are using online auction sales to clear unwanted items from your attic or basement or are intent upon becoming a virtual entrepreneur, you should be aware of the tax rules that apply to your sales proceeds.
When are income taxes an issue? As so often happens, it all depends.
Casual sales of personal propertythat leftover baby furniture or unused exercise equipment that’s been gathering dust in your atticgenerally do not have any tax consequences. In most cases, the amount you receive for items auctioned online will be less than the prices you paid for the items in the first place. Moreover, because the items are personal, household items, the losses are nondeductible personal losses Therefore, there’s no need to report the transaction on your tax return.
On the other hand, if you auction off antiques or collectibles, it’s a different story. In many cases, the amounts you receive for the items will far exceed the amounts you paid for the itemsand, in some cases, you may have paid nothing at all, having received the items as gifts or inheritances.
The profit on the casual sale of a collectible or antique is treated as gain from the sale of a capital asset. If the property has been held for more than one year, as will usually be the case, the gain will qualify as long-term capital gain eligible for favorable tax rates. In some cases, however, an online auction may generate short-term capital gain if an antique or collectible was held for less than one year before the sale. For example, suppose you stumble upon a rare coin collection at a neighborhood garage sale and immediately auction it off on EBay, realizing a healthy profit. Because of the quick turnaround, the gain on the sale will be treated as short-term capital gain taxable at ordinary income tax rates.
If you make frequent sales on E-Bay or another online auction site, it is important to determine whether your sales activity is a business or a hobby This characterization will determine the tax treatment of any gain on your salesand it will also determine the extent to which you can deduct sales-related expenses. Personal use property is a capital asset, generating capital gain on a sale. So, if you sell personal items on EBay on an occasional basis, the income is probably capital gain. By contrast, stock in trade, inventory, and other property held mainly for sale to customers are not capital assets. Therefore, any gain on the sale of such property is treated as ordinary income, subject to regular tax rates. So if you acquire items for the specific purpose of selling them online, the items are inventory that generate ordinary income.
On the flip side, when the activity is not undertaken for profit that is, when it is a hobby related expenses are generally not deductible over and above the income from the activity. In contrast, all ordinary and necessary expenses of a trade or business are fully deductible.
If you have made any online sales or are considering such sales, we will be happy to advise you on the proper handling of your transactions for tax purposes.